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The Timing of Bets and the Favorite-Longshot Bias

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Author Info

  • Marco Ottaviani

    (London Business School)

  • Peter Norman Sørensen

    (Institute of Economics, University of Copenhagen)

Abstract

In parimutuel betting markets, it has been observed that proportionally too many bets are placed on longshots, late bets are more informative than early bets, and a sizeable fraction of bets are placed early. We propose an explanation for these facts based on equilibrium incentives of privately informed rational bettors, who profit from betting against bettors with recreational motives. We show that small rational bettors who act on private information have an incentive to wait until the last minute, and then bet without access to the information of the others. Once the distribution of bets is revealed, the longshot is recognized to be less likely to win than was originally thought. When acting on common information instead, bettors have an incentive to place early bets in order to preempt others from exploiting the same information.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics. Finance Research Unit in its series FRU Working Papers with number 2004/12.

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Length: 19 pages
Date of creation: Nov 2004
Date of revision:
Handle: RePEc:kud:kuiefr:200412

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Related research

Keywords: parimutuel betting; favorite-longshot bias; private information; timing;

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Cited by:
  1. Frederic Koessler & Charles Noussair & Anthony Ziegelmeyer, 2006. "Parimutuel Betting under Asymmetric Information," Papers on Strategic Interaction 2006-05, Max Planck Institute of Economics, Strategic Interaction Group.
  2. Jianying Qiu, 2007. "Loss aversion and mental accounting: the favorite longshot bias in parimutuel betting," Jena Economic Research Papers 2007-017, Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics.

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